(1a) What is Online Shopping’s current share price, assuming an efficient stockmarket and no other information about the company? (1b) What is the company’s annual reinvestment i.e. plow‐back ratio and its average annual return on equity (ROE)? (1c) Suppose you are a fund manager deciding whether to invest in this stock at the current market price. Given your Investment Fund’s limited investment period, if you purchase the shares now (at year 0), then you must sell the shares before the end of year 4. At what minimum share price would you have to sell at the end, if you need to justify the current share price and your opportunity cost of investing in stocks of this risk level is actually 10% (higher than Online Shopping
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
Online Shopping Incorporated’s annual earnings and dividends per share are expected to grow
perpetually i.e. indefinitely by 4% a year. The company’s next year's earnings per share is $10 and
dividend per share is $6. Its market capitalization rate is 8%.
(1a) What is Online Shopping’s current share price, assuming an efficient stockmarket and no
other information about the company?
(1b) What is the company’s annual reinvestment i.e. plow‐back ratio and its average annual
on equity
(1c) Suppose you are a fund manager deciding whether to invest in this stock at the current market
price. Given your Investment Fund’s limited investment period, if you purchase the shares now
(at year 0), then you must sell the shares before the end of year 4. At what minimum share price
would you have to sell at the end, if you need to justify the current share price and your
stock’s current market capitalization rate)?
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